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Chapter 13 - Current liabilities, provisions, and contingencies. After completing this chapter you should be able to: Describe the nature, type, and valuation of current liabilities, explain the classification issues of short-term debt expected to be refinanced, identify types of employee-related liabilities, identify the criteria used to account for and disclose gain and loss contingencies.
13-1 PREVIEW OF CHAPTER 13 Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 13-2 13 Current Liabilities, Provisions, and Contingencies LEARNING OBJECTIVES After studying this chapter, you should be able to: 13-3 Describe the nature, type, and valuation of current liabilities Explain the accounting for different types of provisions Explain the classification issues of shortterm debt expected to be refinanced Identify the criteria used to account for and disclose contingent liabilities and assets Identify types of employeerelated liabilities Indicate how to present and analyze liabilityrelated information CURRENT LIABILITIES Three essential characteristics: Present obligation Arises from past events 13-4 Results in an outflow of resources (cash, goods, services) LO CURRENT LIABILITIES A current liability is reported if one of two conditions exists: Liability is expected to be settled within its normal operating cycle; or Liability is expected to be settled within 12 months after the reporting date The operating cycle is the period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collections 13-5 LO CURRENT LIABILITIES Typical Current Liabilities: Accounts payable Notes payable Current maturities of long term debt Shortterm obligations expected to be refinanced Dividends payable 13-6 Customer advances and deposits Unearned revenues Sales and valueadded taxes payable Income taxes payable 10 Employeerelated liabilities LO CURRENT LIABILITIES Accounts Payable (trade accounts payable) Balances owed to others for goods, supplies, or services purchased on open account 13-7 u Time lag between the receipt of services or acquisition of title to assets and the payment for them. u Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state period of extended credit, commonly 30 to 60 days LO CURRENT LIABILITIES Notes Payable Written promises to pay a certain sum of money on a specified future date 13-8 u Arise from purchases, financing, or other transactions u Notes classified as shortterm or longterm u Notes may be interestbearing or zerointerestbearing LO CURRENT LIABILITIES InterestBearing Note Issued Illustration: Castle National Bank agrees to lend €100,000 on March 1, 2015, to Landscape Co. if Landscape signs a €100,000, 6 percent, fourmonth note. Landscape records the cash received on March 1 as follows: Cash 100,000 Notes Payable 100,000 13-9 LO InterestBearing Note Issued If Landscape prepares financial statements semiannually, it makes the following adjusting entry to recognize interest expense and interest payable at June 30, 2015: Interest calculation = (€100,000 x 6% x 4/12) = €2,000 Interest Expense 2,000 Interest Payable 2,000 13-10 LO Common Types of Provisions Restructuring Provisions Restructurings are defined as a “program that is planned and controlled by management and materially changes either the scope of a business undertaken by the company; or the manner in which that business is conducted.” Companies are required to have a detailed formal plan for the restructuring and to have raised a valid expectation to those affected by implementation or announcement of the plan 13-86 LO Restructuring Provisions IFRS provides specific guidance related to certain costs and losses that should be excluded from the restructuring provision ILLUSTRATION 1313 Costs Included/Excluded from Restructuring Provision 13-87 LO Restructuring Provisions 13-88 LO Common Types of Provisions SelfInsurance Selfinsurance is not insurance, but risk assumption There is little theoretical justification for the establishment of a liability based on a hypothetical charge to insurance expense Conditions for accrual stated in IFRS are not satisfied prior to the occurrence of the event 13-89 LO Disclosure Related to Provisions A company must provide a reconciliation of its beginning to ending balance for each major class of provisions, identifying what caused the change during the period. In addition, ►Provision must be described and the expected timing of any outflows disclosed. ►Disclosure about uncertainties related to expected outflows as well as expected reimbursements should be provided 13-90 LO 13 Current Liabilities, Provisions, and Contingencies LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the nature, type, and valuation of current liabilities Explain the accounting for different types of provisions Explain the classification issues of shortterm debt expected to be refinanced Identify the criteria used to account for and disclose contingent liabilities and assets Identify types of employeerelated liabilities 13-91 Indicate how to present and analyze liabilityrelated information CONTINGENCIES Contingent Liabilities Contingent liabilities are not recognized in the financial statements because they are A possible obligation (not yet confirmed), A present obligation for which it is not probable that payment will be made, or A present obligation for which a reliable estimate of the obligation cannot be made. 13-92 LO Contingent Liabilities Illustration 1316 presents the general guidelines for the accounting and reporting of contingent liabilities ILLUSTRATION 1316 Contingent Liability Guidelines 13-93 LO CONTINGENCIES Contingent Assets A contingent asset is a possible asset that arises from past events and whose existence will be confirmed by the occurrence or nonoccurrence of uncertain future events not wholly within the control of the company. Typical contingent assets are: Possible receipts of monies from gifts, donations, bonuses Possible refunds from the government in tax disputes Pending court cases with a probable favorable outcome Contingent assets are not recognized on the statement of financial position 13-94 LO Contingent Assets The general rules related to contingent assets are presented in Illustration 1318 ILLUSTRATION 1318 Contingent Asset Guidelines Contingent assets are disclosed when an inflow of economic benefits is considered more likely than not to occur (greater than 50 percent) 13-95 LO 13 Current Liabilities, Provisions, and Contingencies LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the nature, type, and valuation of current liabilities Explain the accounting for different types of provisions Explain the classification issues of shortterm debt expected to be refinanced Identify the criteria used to account for and disclose contingent liabilities and assets Identify types of employeerelated liabilities Indicate how to present and analyze liabilityrelated information 13-96 PRESENTATION AND ANALYSIS Presentation of Current Liabilities uUsually reported at their full maturity value uDifference between present value and the maturity value is considered immaterial 13-97 LO Presentation of Current Liabilities ILLUSTRATION 1319 Current Assets and IllustrationCurrent Liabilities 13-15 13-98 Analysis of Current Liabilities Liquidity regarding a liability is the expected time to elapse before its payment. Two ratios to help assess liquidity are: Illustration: Compute these two ratios using the information for Wilmar International Limited (SGP) in Illustration 1319 13-99 LO COPYRIGHT Copyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 13-100 ...PREVIEW OF? ?CHAPTER 13 Intermediate? ?Accounting IFRS? ?2nd? ?Edition Kieso,? ?Weygandt,? ?and? ?Warfield? ? 1 3- 2 13 Current Liabilities, Provisions, and Contingencies LEARNING OBJECTIVES After studying this? ?chapter, you should be able to:... uDifferences between taxable income and? ?accounting? ?income sometimes occur (Chapter? ?19) 1 3- 35 LO 13 Current Liabilities, Provisions, and Contingencies LEARNING OBJECTIVES After studying this? ?chapter, you should be able to:... uCompensated absences uBonuses 1 3- 37 LO EmployeeRelated Liabilities Payroll Deductions Taxes: ►Social Security Taxes ►Income Tax Withholding ILLUSTRATION? ?13? ?4 Summary of Payroll Liabilities 1 3- 38 LO EmployeeRelated Liabilities